Homeowners Insurance Company Tactics to Cheat Policyholders Out of Payments

Many homeowners assume that their insurance company will fulfill their obligations under a policy if the premiums have been paid in a timely manner. However, the insurance industry has a dirty little secret that often surprises policyholders. When a disaster like a hurricane causes devastating financial losses to homeowners, insurance companies routinely shirk their contractual obligation to fully pay claims. Instead, they pay far less than the value promised under the policy. According to industry studies reported by Bloomberg, insurance carriers typically pay between 30-60 percent less than the cost to rebuild an insured’s home. This average for underpayment of claims even takes into account the thousands of homeowners who file complaints with their state insurance regulator or lawsuits in court.

The underpayment of homeowner claims has yielded huge profits for the insurance industry. During one recent year period, property insurance carriers increase their profits from $49 billion to $73 billion. Court records from Florida and other states reveal the many tactics insurance companies use to underpay claims, such as:

Use of computer programs to reduce payments

Manipulating or altering engineering reports

Encouraging adjusters to lie to policyholders

Refusing to pay market value for damaged homes and personal property

Making voluminous and frivolous requests for documents and information

Insurance companies routinely deny claims or refuse to pay the genuine value of a claim while daring policyholders to fight. As a former Texas Insurance Commissioner pointed out to Bloomberg, money managers have taken over the insurance industry. This change has shifted the focus of the insurance industry from their customers to their bottom line for the next quarter.

While a natural tension has always existed between the demands for compensation by policyholders and insurer goals of increasing profits, the focus on minimizing payouts to customers surged in the 1990s. In the wake of Hurricane Hugo, Allstate Insurance, the second largest homeowners insurance carrier, and State Farm, the third largest homeowners insurance company in the U.S., sought advice from McKinsey & Co. on how to streamline claims and increase profits. The consulting firm generated 13,000 pages of documents along with PowerPoint slides focused on increasing profits by minimizing the amount paid out on claims.

One of the slides prepared by McKinsey was entitled “Good Hands or Boxing Gloves” which distorted the longtime slogan of Allstate as the “Good Hands People”. The new approach was to offer “good hands” if policyholders accept an initial lowball claim, but the insurance company would go to war if policyholder reject the lowball offer or retain legal counsel.

Another slide had a picture of an alligator with the caption “sit and wait”. The message of the slide was that insurers can dissuade policyholders from filing legitimate claims by stalling court proceedings and delaying settlements. McKinsey advised that insurers could increase profits by leaving money that would otherwise be paid out in claims invested for longer periods. The insurer also was advised that making the claims process tedious and time consuming would eventually wear down claimants.

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